Morningstar Equities

Morningstar Equities

AGL Energy Limited AGK| Retail competition intensifying but dividend safe

Morningstar Recommendation: Hold
Gareth James, Morningstar Analyst - 02 9276 4583
Major energy retailers, Origin Energy and Energy Australia (EA), are finally responding to AGL’s market share gains over the past two years. Since they acquired the New South Wales government owned energy retailers in 2011, AGL happily targeted their customer bases, and with much success. In the first half of fiscal 2013 AGL had a stellar run, increasing customer numbers and profit margins while its competitors floundered. But the ensuing price war appears to be engrossing AGL with profit margins contracting and fiscal 2013 profit guidance looking increasingly challenging. Problems with door to door sales people saw AGL exit the practice earlier this year. However, with Origin still reviewing its position and smaller retailers continuing the practice, AGL is at a temporary disadvantage.

BlueScope Steel Limited BSL| Asset sales positive but outlook still challenging

Morningstar Recommendation: Sell
Mathew Hodge, Morningstar Analyst - 02 9276 4459
We have taken a closer look at the Nippon Steel joint venture agreement and raise our fair value from AUD 2.00 to AUD 2.30 per share. The deal saw BlueScope sell 50% of its Coated Products joint venture to Nippon Steel for USD 540 million in March 2013. The price paid equates to approximately 12 times EBITDA or 20 times EBIT, quite rich multiples and an attractive price to be selling. The concurrent high priced asset sale and debt repayment which cleans up the balance sheet is a tick for management. Pro-forma net debt at end 2012 was AUD 110 million and sees BlueScope finally in sound financial shape.

Fonterra Shareholders' Fund FSF, FSF-NZ| Trimming estimates on near term headwind

Morningstar Recommendation: Reduce
Nachi Moghe, Morningstar Analyst - 64 9 915 6776
Fonterra recently announced an opening forecast Farmgate Milk Price (FMP) of NZD7.00 per kg of milk solids (MS) for the 2013/2014 season which began on 1 June 2013, an increase of NZD1.20 compared to the 2012/2013 season. The firm also indicated its operating earnings will be hit by NZD 25 million (or NZ 1.5cents per share) in 2013 as it was required to supply large volumes of milk (as per the Raw Milk Regulation) to competitors at subsidized prices from March to May because of the drought. In light of this impact and the ongoing investments in China to support the company’s growth plans we are trimming our 2013 and 2014 forecasts by 4% and 6% respectively.

Shopping Centres Australasia Property Group SCP| Pricy acquisition adds more of the same

Morningstar Recommendation: Hold
Tony Sherlock, Morningstar Analyst - 02 9276 4584
SCA Property Group (SCP) is acquiring seven neighbourhood shopping centres for $133.8m at an initial yield of 7.7%. Other outlays include $2m for development land and $11.1 in transaction costs covering stamp duty, due diligence and capital raising fees. Funding will come from an underwritten $90m institutional placement and a Unit Purchase Plan (UPP) of up to $20m, with eligible unitholders able to acquire between $5,000 and $20,000 of securities at $1.58 per security. Five of the shopping centres are anchored by either a Coles or Woolworths supermarket, one is anchored by a Big W department store and Dan Murphy’s and one is anchored by a Target department store.

Sigma Pharmaceuticals Limited SIP| Trans-Tasman consolidation; scale paves the way for increased competition

Morningstar Recommendation: Reduce
Michael Higgins, Morningstar Analyst - 02 9276 4530
Last week, New Zealand pharmaceutical and medical products company – EBOS Group – acquired leading Australian peer Symbion. While the acquisition is still subject to certain conditions, including EBOS shareholder approval which is slated for 14 June 2013, we don’t expect any surprises. The acquisition of Symbion transforms EBOS from a predominantly domestic oriented company into the largest and most diversified Australasian marketer, wholesaler and distributor of medical and pharmaceutical products. Success in pharmaceutical distribution relies on scale, so we expect EBOS to leverage group buying power and management expertise in the combined group. While we don’t expect an immediate impact to Sigma’s bottom line, increased competition will weaken Sigma’s competitive position over the longer term. Despite a progressively diversified revenue stream from chemist banners (Amcal and Guardian) and a growing retail offering, we consider Sigma slightly overvalued at current prices given the downside risk of Pharmaceutical Benefits Scheme (PBS) reforms. We feel a PER of 16x fiscal 2014 earnings does not appropriately value the true risks facing the company.

Santos Limited STO| Fair value crimped by capex but trend to improving returns persists

Morningstar Recommendation: Hold
Mark Taylor, Morningstar Analyst - 02 9276 4478
We reduce our Santos fair value estimate by 18% to AUD 14 per share after forecasting increased sustaining capital expenditure but we consider the shares fairly valued. Including exploration expenditure, we project AUD 10.3 billion in all up capital expenditure for the five years to 2017. This includes AUD 4.3 billion on Gladstone and PNG LNG projects, which combined will increase group equity production by 60% to 85 million barrels of oil equivalent (mmboe) by 2017. PNG LNG is 80% complete and on schedule for first production in 2014. Gladstone LNG is 50% complete and on schedule for first production in 2015. Build-up to full production including a second Gladstone LNG train and a third PNG LNG train is expected to take until 2017.

Suncorp Group Limited SUN| Painful loan sale, but outlook for surplus capital improves

Morningstar Recommendation: Hold
David Ellis, Morningstar Analyst - 02 9276 4582
Our Suncorp surplus capital thesis is intact despite the larger than expected discount needed to sell assets from the non-core bank. The AUD 1.6 billion portfolio of corporate and property loans was sold at a weighted realisation of 60 cents in the dollar. Despite the additional bad debt provision and write-down, the portfolio sale is basically a balance sheet transaction, swapping AUD 1.6 billion in loans (majority non-performing) with AUD 1.0 billion in cash. The total non-core loan portfolio stood at AUD 2.8 billion at 31 May 2013 and guidance is for further organic run-off and individual loan sales of AUD 500 million in June and AUD 200 million in July. The residual AUD 500 million in loans will be managed as part of Suncorp’s core-loan portfolio and will likely run-down completely before June 2014. The non-core loan portfolio sale effectively wipes out about AUD 500 million in capital, but the removal of non-performing loans cleans up the balance sheet and boosts the long-term outlook. We retain our AUD 12.00 per share fair value estimate, with the stock trading close to our valuation.

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